How are changes in higher education funding contributing to the accumulation of student loan debt?

President Biden caused a stir last month when he announced that his administration would cancel up to $20,000 in federal student loan debt for Americans making less than $125,000. My social media feeds went nuts with folks on one side of the issue celebrating the policy as a leap toward economic equity, and folks on the other side lamenting the policy as unfair to those who had already paid their higher education bills.

It’s often the case that the truth lies somewhere between the extremes, but in this case, I think the truth may actually be that both sides are right. This loan forgiveness policy will benefit a lot of low-income families who could really use the lift, and it’s not fair.

I’ll expand more on that in my next From the Murphy Center column. But, first, a little background on the higher education market. It’s not the free and efficient market of an economist’s dreams.

Loans aside, there is all sorts of government intervention in the market for higher education. Coastal is a state college, which means a big chunk of our annual budget comes from state appropriated (taxpayer) funds, and we operate within state policies that govern our operations including the programs we offer and what we can charge students in tuition and fees.

These are not necessarily bad interventions. As my colleague Dr. Mathews showed in his recent column on the local impacts of our graduates, higher education has a greater impact on communities than simply the impact on the individuals who earn that education. This is the sort of market where governments should get involved to encourage more participation.

And, overall, in the last half-century we have seen tremendous growth in demand for higher education. As demand for higher education has increased, though, so has the price of that education, and state governments are contributing less and less toward that price, driving up the cost to students. This trend has remained true even as demographic shifts have caused increasing demand for college to slow dramatically in the most recent decade.

In Georgia, the general funds budget, per-student for all public colleges and universities declined 1% from the 2009-10 academic year to 2018-19, largely driven by major consolidations in the University System. State appropriations per student fell 18%, and student-paid tuition and fees rose 37% on average per student. It’s no wonder that the percent of Georgia students originating a loan increased from approximately 46% in 2010 to approximately 71% in 2019.

At Coastal, consistently ranked among the most affordable colleges in the nation, our general funds budget per credit hour attempted by students increased 30% from the 2009-10 academic year to 2018-19. State appropriations per credit hour rose by only 2%, while student-paid tuition and fees per credit hour rose 128%. The percent of our students originating a loan increased from 40% in 2010 to 48% in 2019.

(These are all inflation-adjusted budgets, accounting for the fact that a 2019 dollar was less valuable than a 2009 dollar.)

This alone would not be a concern to an economist. Coastal and the University System had greater enrollment in 2019 than in 2009. Increases in demand should increase prices, and it is not unreasonable to ask the consumer to pay that price.

My cause for concern is not that increasing demand has increased price. My concern is one layer back, at the source of the increased demand, and this is where student loans come in.

Demand for investments—and for loans to finance those investments— should always be directly related to the expected returns from those investments. The return on investment to education is always positive. But, with the help of family and cultural pressures, the ease of access to education loans gives students a false impression of how high those returns will be relative to the cost of debt. The result is a lot more folks getting a lot more education than they would in a more honest market and getting into a lot more debt than they ultimately can afford.

More on how that happens and how to make it better in my next column. Stay tuned.

————-

Dr. Melissa Trussell is a professor in the School of Business and Public Management at College of Coastal Georgia who works with the college’s Reg Murphy Center for Economic and Policy Studies. Contact her at mtrussell@ccga.edu.